Case Law Details
Ashish Manoj Bhatia Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that genuineness of source of purchase and sale of shares thereof remained unexplained and hence concluded that the sale of such shares were only accommodation entry and accordingly addition of entire sale consideration upheld.
Facts- The issue in the present appeal relates to long capital gain on sale of shares claimed as exempt by the assessee under section 10(38) of the Act, being held as bogus and addition made of the entire sale consideration received accordingly to the income of assessee treating entire transaction only as accommodation entry.
Conclusion- The assessee was unable to satisfactorily explain the source of purchase of these shares, stated to be purchased off market, in cash, kept in pool holding of share broker and dematerialized only on the day when sold i.e 06-08-2014. Accordingly, it can be concluded that the sale of these shares by the assessee as only a colorable device /accommodation entry and treated the entire capital gain as income of the assessee.
Held that there was no credible evidence to say that the assessee was having shares till 8.8.2014 and why the shares were with the broker till they were sold was not known. He accordingly held the entire evidences self-serving and stage-managed, and therefore, upheld the addition made by the AO.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The present appeal has been filed by the assessee against order passed by the Commissioner of Income Tax(Appeals)-4, Ahmedabad (in short referred to as ld. CIT(A)) under section 2 50(6) of the Income Tax Act, 1961 (“the Act” for short), dated 18.2.2019 pertaining to Asst. Year 2015-16.
2. None appeared on behalf of the assessee. It has been noticed from order sheet entries of hearings conducted before us that the assessee has remained un-represented from 9.7.2021 to 19.9.2022. All notices were served on the assessee and due postal receipts have been placed on record. In fact a perusal of entries in the order sheets would indicate that the assessee has chosen not to prosecute his appeal despite giving several occasions. Therefore, I have no other option but to proceed with the matter for adjudication on the basis of material available on record.
3. The grounds raised by the assessee are as under:
1. CIT(A) erred in law by not allowing the exemption u/s. 10(38) of the Income Tax Act in respect of long term capital gain earned on shares. This act of CIT(A) is out of ambit of law._______
2. CIT(A) erred in law by not considering the cash payment for purchase of shares as genuine payment in spite of evidences for cash payment submitted before AO as well as before CIT(A). CIT(A) believe that only payment made through cheque is the genuine payment for purchase of This act of CIT(A) is against the principle of law.
3. CIT(A) has erred by confirming the addition Which was made by AO without giving opportunity of Cross Examination of third party in spite of assessee’s request to AO. This act of CIT[A) is against the principle of natural justice.
4. CIT(A) erred in confirming the addition made by AO which was made by AO based on surmises & conjectures. This act of CIT(A) is against the Justice and against the law.
4. The issue in the present appeal relates to long capital gain on sale of shares claimed as exempt by the assessee under section 10(38) of the Act, being held as bogus and addition made of the entire sale consideration received accordingly to the income of assessee treating entire transaction only as accommodation entry. The relevant facts and finding of the ld. CIT(A) in this regard at para 4 of his order is as under:
“4. DECISION: I have gone through the facts mentioned in the assessment order and the submission filed by the appellant carefully. The ground no. 1 is relating to the addition of LTCG which has been claimed as exempt u/s. 10(38) of the I. T. Act. 1961 relying on information collected from the broker and certain report(s) from Investigation Wing of department and SEBI. The AO’s order is very comprehensive giving facts and figures touching upon all the aspects of the controversy involved. The AO is of the opinion that the share transactions are suspicious in nature as the purchase has been at very low price and the sale has been at very high price. The AO relied on the ratio of certain case laws pertaining to penny stock cases. The assessee is engaged in the business of real estate developer. The relevant portion of the assessment order giving basic facts, of the case, is reproduced as under: –
“The above modus operandi was found during the course of such u/s. 132(1) of the IT Act conducted by DDIT, Investigation Wing, Patna on 13.01.2016 in the case of Penny: Stock Indian Infotech & Software Ltd (INDINFO). The shares of the above company have been rigged Gain to various beneficiaries. Accommodation entry of LTCG to the! tune of Rs. 1418 Crore have been provided to various beneficiaries, through this Scrip, in lieu of cash commission. During the course of search, entry operators as well as! beneficiaries have accepted that shares of Indian Infotech & Software Ltd (INDINFO), j have been rigged up to provide bogus accommodation entry of Long Term Capital Gain.
In the instant case, the assessee has also adopted the above modus operand/ by taking accommodation entries and claimed the long term capital gain of Rs. 1496591/- in respect of sale of Life fine Drugs & Pharma Ltd the same is claimed as exempt income. Further, the source of purchase are also not explainable. As shown the above chart, the value of shares of Life line Drugs & Pharma Ltd Is very less. The assessee was also requested to explain the source of payment made for the purchase of shares. However, the details submitted by the assessee source that the said was purchase as off market transaction. The shares were kept in pull holding of the brokers. The payment for the purchase were made in cash. The shares were demitasse on 06/08/2014 on the date of sale. Hence, the genuineness of purchase of share are not established.
The capital gains out of the sale of the above shares have been claimed as exempt income. The assessee has also not explained any valid reason for the purchase of such shares at very lower price. Further, the stock exchange has suspended Life line Drugs & Pharma Ltd from trading with effect from 28/08/2015. On account of surveillance measures by the exchange All these sequence of facts and modus operand/ adopted by the assessee, proved that the shares does not fetch any potential value and the shares sold at very higher price is nothing but the accommodation entries taken by the assessee to camouflage his undisclosed income under the garb of capital gains, income from which is exempt income. This is nothing but colorful device just to avoid legitimated payment of tax which is not permissible as per law, In view of the decision of the MC Dowell & Co. Ltd. Vs CTO 154 ITR 148 (SC) in which it is held that the modus operand! adopted by the assessee by infusing undisclosed amount into coffers of the assessee without paying any taxes is nothing but a colourable device. Further it is also mentioned in the above decision that “the taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine .the true character of the relationship.” Moreover, the*-Hon*ble High Court of Delhi in recent decision dated 19.11.2015 reported in ITA 130/2001 Commissioner of Income Tax Vs M/s. Abhinandan Investment Ltd., has categorically explained the principle laid down by the Supreme Court in the case of MC Dowell & Co and the same is fully applicable in the fact of the penny stock cases.
In view of the above, the amount of Rs. 1496591/- in respect of Life line Drugs & Pharma Ltd is treated as undisclosed income and the same is added to total income of the assessee. Penalty proceedings u/s. 271(l)(c) of the IT Act are initiated for furnishing inaccurate particulars of income.”
Therefore, the mode of payment for purchase of shares was necessary to be enquired along with circumstantial evidences. In fact, in such investigation there is no doubt on the sale of shares as same is normally done through banking channel and through recognized stock brokers. Such evidences for sale of shares are credible which encourages the assessees to claim deduction u/s. 10(38). Therefore, jurisdictional ratio in the case of Jute Corporation of India Ltd. -187 ITR 688 (SC) has been applied. Hence, the real issue is to verify the purchase of shares and to know as to how much independent evidences are available to support the case of appellant. As credible information about the purchase of shares was not available or verified or reflected properly in assessment order, the same was asked during appellate proceedings and is reproduced as under:-
The perusal of information in table above indicates that the shares were purchased in cash and not explainable as to why the payment was not made through banking channel. The AO has pointed out that because of lack of credible explanation for payment in cash, it is a case of accommodation entry at the cost of revenue. Appellant has the bank account but not used for making payment for purchase of shares through cheque and the same shifts the onus to the appellant which has not been and could not be shifted to the AO. Secondly, the shares were never in his demat account till 08.08.2014. Thirdly, the shares have been sold the same day of arrival in demat account. Fourthly, the name of the broker prominently reflects in any of the investigation report on the issue involved. The shares were not held by the appellant in his/her demat account.
As far as procedural aspect is concerned, the shares were kept in pool holding of the broker, M/s. Vijay Bhagwandas & Co. As per SEBI’s rule, if the full payment of share purchase made, then the broker must transfer the shares to the. client demat account within 24 hours. In this case, the assessee alleged to have made payment on 01.04.2013 and shares of Lifeline Drugs & Pharma Limited converted in demat form on 08.08.2014. Hence, the plea, of the assessee in respect of the share in pool account of the broker is not correct and hence rejected.
In the circumstances, there is no independent credible evidence so as to show that the-appellant was holding the shares till 08.08.2014, and it is not known as to why the shares were with the broker till the time these were sold. The evidences for shares before 08.08.2014 is nothing but manufactured evidences for self-serving statement by the beneficiaries such as appellant, the seller and the pool account holder. The appellant relied on the ratio of following case laws:
The above case laws have been perused w. r. t. peculiar facts of instant case. The appellant tried to explain the issue through certain case laws but the factual matrix is entirely against the appellant and no case law from jurisdictional High Court/ITAT, Ahmedabad to absolve him in such circumstances, has been placed on record, for instance shares purchased in cash devoid of any independent corroborative evidence for the alleged purchase of the same. The AO has mentioned that the company involved has changed its name thrice since inception with the change of business line from medical to trading in steel and textile segments. The AO has considered many of the case laws now relied by the appellant and specifically commented on the formal opportunity for cross examination with the comment that the lead evidence is an integral part of quasi judicial adjudications. The issue of cross examination is stated that In respect of the request of cross examination is concerned, it is stated that the Income Tax proceedings are semi judicial proceedings. The necessary evidence has been provided to the assessee. The same should be considered as fair and reasonable opportunities of being heard. The reliance is placed for the issue, on the decision of Hon’ble Supreme Court recorded in 82 ITR 540 (SC), 181 ITR 667 (SC), 214 IR 801, in which the Hon’ble Supreme Court has held as under:
“In the income tax cases the suit is that of a Civil case in which one has to go by the preponderance of probability and not by an evidence to prove it to the guilt, it has been observed by the than Apex Court that the Courts will not be obvious to the notorious fact of life….”;
The contention of the AO on cross examination is accepted in view of Hon’ble Supreme Court Judgments recorded at 82 ITR 540 (SC), 214 ITR 801 (SC) & 191 ITR 667 (SC) as all material facts were clearly disclosed to the appellant.
In such circumstances, the ratio laid down by case law if accepted in this peculiar case, becomes far from the destined judicial path stipulated therein. The appellant was not able to prove the ownership of the shares as same is alleged to have happened through payment of cash and is not brought in personal demat account. Similar issue has been dealt in detail in ITAT Mumbai’s judgment in the case, of Ratnakar M, Pujari vs. ITO (ITA No.995/Mum/2012: A. Y.2006-07) dated 03.08.2016 wherein the appeal of assessee is dismissed on. similar facts. In another decision delivered on 27.03.2015 on similar fact the Hon’ble ITAT, E-Bench, Mumbai has allowed the Revenue appeal in the case of Shamim M. Bharwani vide ITA No.4906/Mum/201 1 (AY2006-07) and observed as under:
“Firstly, documentary evidences, in the face of unusual events, as prevailing in the instant case, and without any corroborative or circumstantial evidences/s, cannot be regarded as conclusive.
Two the preponderance of probabilities only denotes the simultaneous existence of several ‘facts’, each probable in itself, albeit low, so as to cast a serious doubt on the truth of the reported ‘facts’ which together make up for a bizarre statement, leading to the inference of collusiveness or a device set up to conceal the truth, ie. in the absence of credit and independent evidences.
In view of the facts and circumstances discussed supra and circumstantial evidence available on record it has been concluded (hat the transactions were sham transactions and aimed only to bring unaccounted money in the guise of exempted Long Term Capital Gains and paper work has been got up and done merely to give a color of authenticity to the transaction and by creating a facade of legitimate transactions. “
Hon’ble ITAT Banglore has confirmed such addition on account of bogus profit on penny stocks in a very recent Judgement in the case of Smt. M.K.Rajeshwari v/s. ITO, ITA No. 1723/Bang/2018 (A.Y.2015-16) dated 12/10/201 8 on similar facts:
The ratio laid down in following case laws is also being applied: Motor and General Stores Pvt. Ltd. -66 ITR 692 (SC):
The name given to a transaction by the parties concerned does not necessarily decide the nature of -the transaction, the question always is what is the real character of the transaction and not what parties call it.”
Sundaram Finance Ltd. – 1966 AIR 1178 (SC):
“Where terms of transaction are embodied in a document the true effect of transaction may be determined from the terms of the. document/agreement considered in light of surrounding circumstances.”
CIT vs. Panipat Woollen ills – 103 ITR 66 (SC):
“A party can’t escape the consequences of law merely by describing an agreement in a particular term through in essence and in substance it may be a different transaction.”
Union of India vs. Gosalia Shipping Pvt. Ltd. – 113 ITR 307 (SC)
“One must have regard to substance of the matter and if necessary to tear the veil in order to see whether the true character of a payment was something other than what by a clever device of drafting it was made to appear.”
Workmen vs. Associated Rubber Industries – 157 ITR 77 (SC):
“It is duty of the Court in every case where ingenuity is expressed to avoid taxing and welfare legislation to get behind the smoke screen and discover the true state of affairs.”
In view of the ratio laid down by the Apex Court in various case laws (supra) and the facts of the case, I am convinced with the findings of AO and don’t intend to interfere. In any case, it is proved the case of revenue that the transaction is of suspicious nature. In my opinion, the transaction is stage-managed to get benefit u/s. 10(38) and the same is not permissible under the Act. In the circumstances, the addition made by AO is hereby confirmed and ground of appeal is dismissed.”
5. I have gone through the order of the Ld. CIT(A) as well as that of the Assessing Officer. I find that both the Revenue authorities i.e. AO and the Ld. CIT(A) have given a detailed finding on the issue of bogus long term capital gain claimed by the assessee.
6. The assessee had shown long term capital gains in respect of sale of 6100 shares of Lifeline Drugs & Pharma Ltd to the tune of 14,96,591/- and claimed the same as exempt u/s 10(38) of the Act. The assessee had purchased 610 shares of the said company on 01/04/2013 for a consideration of Rs.22,164/- at a value of Rs.36. 10/- per share . On 13/11/2013 these 610 shares were split into 6100 shares and subsequently sold on 08/08/20 14 for Rs. 15,18,755/- @ Rs.248.97/- per share. Thus shares purchased @ Rs.3.61 /- per share were sold @ Rs. Rs.248.97/- per share within a short span of a year.
7. The AO noted the history of the shares and found that it could not have been sold at such a high price . He further found that the stock exchange had suspended these shares from trading w.e.f 28th August 2015 on account of surveillance measures by the Exchange. AO also found that the assessee was unable to satisfactorily explain the source of purchase of these shares, stated to be purchased off market ,in cash ,kept in pool holding of share broker and dematerialized only on the day when sold i.e 06-08-2014. Based on all the above, he held the sale of these shares by the assessee as only a colorable device /accommodation entry and treated the entire capital gain as income of the assessee.
8. The Ld.CIT(A), considering all the facts as noted by the AO, thought it necessary to inquire about the source of purchase of shares for determining genuineness of the transactions and found them to have been made in cash. He also noted that shares were never in DEMAT account of the assessee till 8.8.20 14. Further, shares were sold on the same day shares were entered in the DEMAT. The ld.CIT(A) also noted that broker’s name was prominently reflected in the investigation report of the Department, and further noted that shares were kept in pool holding of the broker. The ld.CIT(A) noted that as per SEBI rules, if full payment of shares purchased was made, then the broker had to transfer the shares to the client’s DEMAT within 24 hours. In the case of the assessee shares were converted into DEMAT form only after seven days. He therefore rejected the assessee’s pleading that the shares were kept in the pool account of the broker, since his explanation was not correct in accordance with the SEBI rules in this regard. The Ld.CIT(A) held that there was no credible evidence to say that the assessee was having shares till 8.8.2014 and why the shares were with the broker till they were sold was not known. He accordingly held the entire evidences self-serving and stage-managed, and therefore, upheld the addition made by the AO.
9. The findings of the ld. CIT(A), we find are very detailed, who has made further inquiry with respect to the issue and found entire transaction to be bogus. Since the assessee has not come before me in support of his appeal, I have no option but to confirm the concurrent finding of both the Revenue authorities on the issue. Accordingly, grounds of appeal of the assessee are rejected.
10. In the result, the appeal of the assessee is dismissed.
Order pronounced in the Court on 28th September, 2022 at Ahmedabad.
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